Toby Courtauld, Chief Executive, said:
"I am pleased to report another period of strong operational activity with healthy leasing ahead of ERV, the continued successful rollout of our flexible space offering, the completion of our share buyback programme and excellent progress at our three committed developments.
Our second half has started well, despite elevated levels of macro-economic and political uncertainty. Occupier interest today remains robust in a market where high quality space is scarce and we have delivered lettings totalling £2.2 million of rent with a further £8.1 million under offer at a 5.4% premium to September 2019 ERVs. Whilst activity in our investment market has slowed, for the international investor, London continues to provide appealing value relative to other global cities.
Although we expect continued political and possibly macro-economic turbulence, GPE is in great shape and ready to take advantage of any market weakness: We are attracting occupiers to our brand of high quality, sensibly-priced sustainable space; we are innovating across our portfolio of well-located properties which is let off low rents with further reversionary potential; our exceptional development pipeline provides us with nearly 1.4 million sq ft of value creating opportunities meaning we have no immediate need to buy; yet, with our modest gearing, we retain significant and low cost financial capacity; and our collaborative culture and focus on developing our experienced and talented team will enable us to maximise the opportunity we have to generate long-term value across our business".
Contacts: |
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Great Portland Estates plc |
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Toby Courtauld, Chief Executive |
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Nick Sanderson, Finance & Operations Director Stephen Burrows, Director of Financial Reporting & IR |
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Finsbury Group |
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James Murgatroyd |
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Gordon Simpson |
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The results presentation will be broadcast live at 9.00am today on: |
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www.gpe.co.uk/investors/latest-results |
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A conference call facility will be available to listen to the presentation at 9.00am today on the following numbers:
UK: 0808 109 0700 (freephone)
International: +44 (0) 20 3003 2666
For further information see www.gpe.co.uk or follow us on Twitter at @GPE_plc
Disclaimer
This announcement contains certain forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward-looking statements.
Any forward-looking statements made by or on behalf of Great Portland Estates plc ("GPE") speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. GPE does not undertake to update forward-looking statements to reflect any changes in GPE's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.
Information contained in this announcement relating to the Company or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance.
To view the accompanying appendices please paste the below into your web browser:
http://www.rns-pdf.londonstockexchange.com/rns/3457T_1-2019-11-13.pdf
Half Year Results
Our market
Introduction
London's commercial real estate markets have again trended broadly flat over the period, lacking clear direction as political and economic uncertainty persisted due to continued negotiations regarding the UK's future relationship with the EU and the prospect of another UK general election. These conditions continued to impact business and consumer confidence over the summer, with PMI surveys further deteriorating as the perceived likelihood of a "no deal" outcome increased. Despite the uncertain environment, activity in London's occupational markets remained resilient, with rental growth in a number of subsectors, although transaction levels in investment markets slowed as vendors have been less willing to bring assets to the market.
For the remainder of the financial year, absent any significant change arising from the forthcoming general election or an adverse outcome with the EU, we expect capital values and rental levels to continue their sideways trajectory. However, whilst the near-term economic and political outlook continues to be challenging to predict, over the long term we believe London's attraction remains undiminished; it will remain a truly global city, adapting to prevailing market conditions and continuing to attract a diverse range of businesses and investors as Europe's business capital.
Subdued economic growth
Momentum in the global economy remained muted in the period as tensions around US-China trade intensified, global manufacturing output slowed and geopolitical tensions resurfaced. Closer to home, UK employment growth slowed and the economy shrunk by 0.2% in the quarter to June, although UK GDP returned to growth of 0.3% in the quarter to September 2019. This subdued environment was reflected in the most recent Deloitte UK CFO survey undertaken in September, which showed a further deterioration in business confidence, with only 7% of CFOs believing now is a good time to take greater risk (down from 9% at March) as Brexit and weak UK demand remain the biggest perceived threats over the next twelve months. As a result, UK GDP forecasts have decreased marginally over the period with Oxford Economics forecasting annual GDP growth over the next three years of 1.5%, down from 1.7% in March. However, London's forecast outperformance has been maintained with annual GDP growth of 1.8% forecast over the next three years.
Occupational markets remain robust
Our occupational markets were active over the six months to 30 September 2019, with businesses continuing to commit to London despite the uncertain backdrop. Central London office take-up was 6.5 million sq ft, very marginally behind the preceding six months and the ten-year average of 6.6 million sq ft. CBRE estimate that central London active demand at September totalled 8.5 million sq ft. Central London availability reduced over the six months to 12.7 million sq ft at 30 September 2019 (13.0 million sq ft at March) and below the ten-year average of 14.3 million sq ft. Moreover, the proportion of the available space that is either newly completed or under construction totalled only 3.6 million sq ft, the lowest since 2000. This low supply of high quality office space has helped support rental values and pre-letting activity across our markets, with tenant incentives (including rent frees) remaining largely unchanged.
In the central London office market as a whole, development completions in the six months to 30 September 2019 were 3.5 million sq ft, with the overall vacancy rate remaining low at 4.0%. However, in the core of the West End, the focus of our committed development activities, completions totalled only 16,500 sq ft in the six month period. This supply shortage has meant that occupiers continue to secure space well in advance of building completion, with 59.3% of the 11.6 million sq ft of space under construction already pre-let or under offer. Looking ahead, the speculative development pipeline continues to be modest. In central London, we estimate that 21.9 million sq ft of new speculative space could be delivered by December 2023, of which only 1.6 million sq ft is in the West End core, equating to only 0.6% of core stock per annum.
West End occupational market
Over the six months to 30 September 2019, West End office take-up was 2.0 million sq ft, down 11.6% on the preceding six months and marginally below the 10 year average, albeit current availability of 3.5 million sq ft is 1.3 million sq ft (or 27.0%) below the ten-year average. Vacancy rates remain low at 2.9% at 30 September 2019, with Grade A vacancy estimated by CBRE to be only 1.8%. CBRE reported that prime office rental values increased over the last six months by £2.50 per sq ft to £110.00 per sq ft, with rent frees one month lower at 23 months on a ten-year lease.
The UK retail environment continues to be challenging due to the combination of lower consumer spending and a structural shift to on-line sales. Whilst London retail continues to outperform the wider UK, we have seen downward pressure on retailers' occupancy costs, which has both impacted rents and demand for larger retail units. However, there are areas of strength. During the period, we successfully commenced the leasing of the retail element of our Hanover Square development on New Bond Street at rents ahead of ERV, and our retail rental values were largely unchanged over the period.
Vacancy on Oxford Street, Regent Street and Bond Street has risen to 7.7%, 8.6% and 7.5% respectively, with prime Zone A rents on Oxford Street and Bond Street £850 per sq ft and £2,200 per sq ft respectively.
City, Midtown and Southbank occupational markets
Over the six months to 30 September 2019, City office take up of 2.9 million sq ft increased by 2.4% on the prior six months and remains ahead of the ten-year average of 2.7 million sq ft. Availability reduced to 5.4 million sq ft (from 5.9 million sq ft at 31 March 2019), with the amount of space under offer at 1.8 million sq ft, 38.8% ahead of the 10-year average. The City vacancy rate was greater than that of the West End at 4.8%, although Grade A vacancy was estimated by CBRE to be 3.3%, down from 3.6% at March. CBRE also reported that City prime rental values increased marginally to £72.00 per sq ft, up £1.00 per sq ft from March 2019, with rent free periods on a ten-year lease unchanged at 24 months.
Take-up in Midtown and Southbank was 0.8 million sq ft, down from 1.6 million sq ft on the preceding six months. Prime office rental values increased by £2.50 per sq ft to £82.50 and £67.50 per sq ft for Midtown and Southbank respectively. Rent frees also remains broadly unchanged at 22- 24 months on average on a ten-year lease.
Less active investment markets
Investment market activity slowed to £4.0 billion in the period, down from £7.4 billion in the preceding six months as a combination of a lack of supply and increased political uncertainty subdued investment volumes. London's attractiveness to international capital was maintained, driven by relative value to other global cities, the low value of Sterling and London's safe haven status. However, heightened levels of uncertainty have resulted in a number of overseas investors waiting for further clarity before committing, meaning that they comprised only 46% of transactions in the quarter to September 2019.
We reported in May 2019 that we estimated £31.8 billion of equity capital was seeking to invest in commercial property across central London compared to only £3.5 billion of stock on the market available to buy. Today we estimate that there is currently £3.6 billion of stock on the market available to buy, whilst the weight of money seeking to invest has increased to £32.8 billion. With levels of equity demand at elevated levels and debt still available for prime quality assets and sponsors, investment yields for office properties remain unchanged. At 30 September 2019, prime office yields were 3.75% and 4.00% in the West End and City respectively, according to CBRE. Over the period retail yields softened, with CBRE reporting that retail yields moved out to 3.00% for Regent Street and Oxford Street, while Bond Street was unchanged at 2.25%.
Poor visibility on market outlook continues
Given the cyclical nature of our markets, we actively monitor numerous lead indicators to help identify key trends in our marketplace. Over the last six months, our property capital value indicators are largely unchanged and continue to provide limited market visibility. Investment activity in the central London commercial property market remains healthy and the real yield spread over gilt yields continues to be supportive. Prime yields are currently trending flat, although it is possible that there is some yield contraction in the event of greater political clarity. We do not expect significant rental value movements in the very near-term and, given the rental performance of the portfolio in the first half of the year, our rental value growth range for the financial year to 31 March 2020 is unchanged at minus 2.0% to +1.5% (see Portfolio Management below).
Our business
Our business is accompanied by graphics (see Appendix 1 and 3)
With our clear purpose of unlocking potential, we are innovating across our operations, preparing our pipeline of future opportunity, developing our talent and working with our communities to create space for London to thrive.
Portfolio management
During the six months to 30 September 2019, we continued our strong leasing activity, letting ahead of ERV while continuing to capture the reversion across the portfolio. Key highlights include:
· 29 new leases were signed during the first half (2018: 37 leases), generating annual rent of £9.9 million (our share: £8.4 million; 2018: £6.6 million), market lettings 9.4% above March 2019 ERVs;
· 23 rent reviews securing £11.7 million p.a. (our share: £10.8 million; 2018: £6.1 million) of rent were settled during the half year, representing an annualised increase of £2.0 million p.a., or 20.9% above the previous passing rent and 0.6% above the ERV at the review date;
· total space covered by new lettings, reviews and renewals during the first half was 358,200 sq ft (2018: 243,400 sq ft);
· £3.8 million of reversion was captured (our share) in the six months to 30 September 2019, with a further reversionary potential of £8.3 million of which 85% is available in the next 18 months;
· 92% (by area) of the 62 leases with breaks or expiries in the twelve months to 30 September 2019 were retained, re-let, or are under offer or under refurbishment, leaving only 8% still to transact; and
· following the successful leasing period, the Group's vacancy rate has decreased to 2.3% at 30 September 2019 (31 March 2019: 4.8%) and Group rent roll has increased by 5.6% to £106.0 million (31 March 2019: £100.4 million).
Key leasing transactions
The table below summarises our leasing transactions in the period:
Leasing Transactions |
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Three months ended 30 September 2019 |
Six months ended 30 September 2019 |
Six months ended 30 September 2018 |
New leases and renewals completed |
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Number |
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17 |
29 |
37 |
GPE share of rent p.a. |
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£6.0 million |
£8.4 million |
£6.6 million |
Area (sq ft) |
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178,400 |
220,100 |
135,400 |
Rent per sq ft (including retail) |
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£78 |
£76 |
£62 |
Rent reviews settled |
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Number |
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16 |
23 |
17 |
GPE share of rent p.a. |
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£8.7 million |
£10.8 million |
£6.1 million |
Area (sq ft) |
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107,600 |
138,100 |
108,000 |
Rent per sq ft (including retail) |
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£87 |
£85 |
£71 |
Note: Includes joint ventures at share
Notable transactions during the six months included:
· at 160 Old Street, EC1, the recently redeveloped building is now fully let following the letting of the two remaining office floors, (to HRS and SenSat), and the final two retail units. Together these totalled 15,200 sq ft of space for a combined rent of £1.1 million (our share: £0.6 million), 10.4% above March 2019 ERV;
· at 24/25 Britton Street EC1, we completed a reversionary lease with Kurt Geiger, extending their existing lease to January 2035, securing a 15 year term (no breaks), and increasing their passing rent by £0.25 million (+10%);
· after the success of our co-working arrangement with Runway East at New City Court, SE1, we have expanded the roll out of our space flexible offering. At City Place House, EC2, we entered into an 82,000 sq ft flexible office partnership arrangement with Knotel. Knotel is a flexible workspace provider and will operate the space until the building's redevelopment in December 2021 and together we will share the revenue generated from the businesses in occupation. Opening of the space will be phased between December 2019 and January 2020 and the space is already 72% pre-let;
· at Wells & More, 45 Mortimer Street, W1, we settled eight rent reviews with New Look, capturing reversion of £0.5 million, and increasing the combined annual rent to £4.3 million, an increase of 14% on the previous passing rent;
· at 95/96 New Bond Street, W1, we settled a rent review with Victorinox Retail (UK) Limited (£550 psf Zone A), increasing the annual rent by £0.4 million to £1.25 million, an increase of 42% on the previous rent; and
· at Carrington House, 126/130 Regent Street, W1, we settled a rent review with Russell & Bromley Limited increasing the annual rent to £1.0 million, an increase of 103% on the previous passing rent and 30% above ERV at the review date.
At 30 September 2019, the average rent across our office portfolio was £56.00 per sq ft, up from £55.20 per sq ft at 31 March 2019.
Since 30 September 2019, our leasing momentum has continued:
· we have completed 7 new leases generating £2.2 million (our share: £2.2 million) of annual rent (19,800 sq ft), with market lettings 1.4% above March 2019 ERVs; and
· a further 90,800 sq ft of space is currently under offer which would deliver approximately £8.1 million p.a. in rent (our share: £8.1 million), with market lettings 8.1% above March 2019 ERVs and 5.4% above September 2019 ERV.
Innovating with our flexible space offering and market leading App
Our leasing track record demonstrates that for many businesses securing high quality, well located space for longer-term occupation is vital. However, we recognise that a growing number of businesses, particularly SMEs, are seeking more flexible office space to meet their needs. Our recent arrangement with Knotel has further extended our commitment to flexible office space, which now stands at more than 200,000 sq ft or around 10% of our office portfolio. Today, our flexible offerings include the following:
Type of space |
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Completed (sq ft) |
Let or pre-let (%) |
Committed (sq ft) |
Appraising (sq ft) |
Total (sq ft) |
Flex |
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48,600 |
100% |
17,900 |
137,000 |
219,800 |
Flex+ |
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- |
- |
16,300 |
Partnerships |
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130,700 |
81% |
- |
16,000 |
146,700 |
Total |
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179,300 |
86% |
34,200 |
153,000 |
366,500 |
We have also extended our flex offerings with the commitment to 16,300 sq ft of new flex+ space at Dufours Place, W1. Our new flex+ space further enhances our current flex product and provides occupiers with added service provision as well as communal facilities such as a courtyard and ground floor café. In total, we are currently appraising a further 153,000 sq ft of flexible space.
In November 2019, we completed the roll out of our new App, further enhancing the level of service we are delivering to our occupiers. Depending on the building, the App enables automated access and environmental control, creates a community platform and provides a number of other services delivered by our concierge manager including on-site dry cleaning services, online shopping delivery and personal package drop-off and collection.
Development management
Today our development programme represents 54% of the portfolio, providing both near-term development uplifts from our committed schemes (19%) and extensive future opportunities from our development pipeline (35%). During the period, we continued to make good progress on our three on-site committed schemes, which will deliver 414,900 sq ft of high-quality space, all targeting BREEAM 'Excellent' and all near Crossrail stations. Together the committed schemes are expected to generate a profit on cost of 18.9% (£123.3 million), of which only 27.4% has been recognised to date. Beyond this, the team continues to prepare the further ten schemes with prospective deliveries into the 2020s and beyond.
Three committed schemes all to benefit from Crossrail; all BREEAM 'Excellent'
At Hanover Square, W1, construction is advancing well with the exterior of the building largely complete. The scheme will deliver 221,100 sq ft of new space, comprising 167,100 sq ft of offices, 41,800 sq ft of retail and restaurant space and 12,200 sq ft of residential apartments. Following the pre-let of 111,400 sq ft of offices in 18 Hanover Square to KKR and Glencore, interest in the remaining 55,700 sq ft of office space across the scheme continues to be strong. Furthermore, following the recent launch of the marketing for the New Bond Street retail space, we let the 5,000 sq ft corner unit to Canali at rents ahead of the March 2019 ERV, with encouraging interest in the remaining space. In total, the scheme is now 53% let and, when complete in Q3 2020, it is expected to deliver a profit on cost of 21.9%.
At Oxford House, 76 Oxford Street, W1, construction of the new building is progressing well with the core now complete to level six. The building will deliver 81,200 sq ft of new offices and 37,900 sq ft of retail space directly opposite the Dean Street entrance to the Tottenham Court Road Crossrail station and completion is targeted for Q2 2021, with an expected profit on cost of 17.3%. Occupier interest for the office space has been strong, given the quality of the building and the continued lack of new-build office supply in the core of the West End. As a result, the entirety of the office space is now under offer. Retail demand has been modest given the building is not planned to complete until 2021 and the more challenging macro backdrop for UK retail. However, early discussions are encouraging.
At The Hickman, E1, the building topped out in October 2019 and we expect to deliver the new 74,700 sq ft Grade A office and retail building in Q1 2020. The Hickman will be our most intelligent building to date. We are pioneering an integrated building App which will deliver real-time data on occupancy, energy consumption, air quality, light and temperature to us and our occupiers, allowing us to better understand how the building is operating and being utilised. Occupier interest in the building is encouraging and we are currently finalising terms with a partner to work with us to deliver a co-working offer for the basement, ground and first floors (together 16,000 sq ft). We are anticipating a profit on cost of 10.7% with average office rents across the building of around £51.55 per sq ft.
At 30 September 2019, the three committed development properties were valued at £506.8 million and required £99.8 million (both our share) of capital expenditure to complete.
Substantial development pipeline
Beyond our three committed schemes, we have a substantial and flexible pipeline of ten uncommitted schemes. These schemes include a number of exciting projects including City Place House, EC2, located 200m from the Moorgate Crossrail station where we are working on plans to maximise the potential of the site by significantly increasing the size of the building to 320,000 sq ft. Initial discussions with the City of London have been encouraging and the project has a proposed start date of 2022. Close by at 50 Finsbury Square, EC2, we have submitted a planning application for a major refurbishment ahead of vacant possession next year. The major refurbishment will see the office floor plates extended within the existing frame of the building and the addition of a roof pavilion and terrace. Finally at New City Court, SE1 in the London Bridge Quarter, we have submitted a planning application to materially increase the size of the existing 98,000 sq ft building to more than 370,000 sq ft and should hear whether our application is successful in the new year.
Our potential development programme totals 1.3 million sq ft today, with the potential to increase this to more than 1.8 million sq ft post development. These schemes cover 54% of GPE's existing portfolio and will provide the bedrock of our development activities into the 2020s.
Investment management
During the quarter, we completed £9.2 million of residential sales, including the last remaining unit at Rathbone Square, W1 for £5.6 million, in line with the March 2019 book value. However, given the strength of the investment market, attractive opportunities to buy were limited and we made no acquisitions.
We have now been a net seller for the past six and half financial years, taking advantage of supportive markets to crystallise surpluses where our business plans were complete. We currently have approximately £60 million of property in the market for sale and are reviewing a further £120 million for potential disposal. However, we continue to explore acquisition opportunities, and over the past six months we have reviewed over £1.0 billion of potential acquisitions. Whilst the number of assets we are reviewing remains high, opportunities providing attractive value remain scarce. Assets with a near-term development opportunity, the sort of assets that we typically look to buy, have seen strong demand and pricing has been robust with only 7% of the assets we reviewed trading within 10% of our view of fair value. Notwithstanding the lack of opportunities, we have no need to buy. Any potential purchase needs to outperform the assets we already own, and with our existing portfolio stacked with opportunity, the hurdle is high.
Sustainability and community
During the period, we committed to the ground breaking Climate Change Commitment launched by members of the Better Buildings Partnership. The commitment is designed to tackle the growing risks of climate change through the delivery of net zero carbon real estate portfolios.
The Commitment aligns with our strategy to transition to a net zero carbon business and requires us to:
· disclose our progress towards our net zero carbon pathway, including whole building performance and occupier activities;
· publicly disclose the energy performance of our portfolio; and
· develop a comprehensive climate change resilience strategy for our portfolio.
This builds on our revised energy and carbon targets that we announced earlier in the year, namely:
· to achieve a 40% reduction in energy intensity and at least a 69% reduction in carbon intensity across our portfolio by 2030;
· for all new build developments completed from 2030 to be net zero carbon; and
· to set out our approach and timescale during this financial year to become a net zero carbon business.
We also delivered a continued strong performance across a number of leading sustainability and ESG indices, including a five star rating in the Global Real Estate Sustainability Benchmark ("GRESB") for the fourth consecutive year and a Gold Award, for the sixth consecutive year, for reporting in accordance with EPRA's European Sustainability Best Practice Recommendations (sBPR).
In order to create space for London to thrive, we have a responsibility to ensure that we have a long lasting positive impact on the communities in which we work. During the period, the GPE team took part in our second annual Community Day, which included helping improve local community gardens and upcycling furniture with Groundwork London in a number of their community projects. We also held a charity bike ride through the Cotswolds to raise money for both Groundwork London and Centrepoint, and together with a number of our suppliers, raised £48,500. Since the commencement of our charity partnership with Centrepoint 18 months ago, we have raised £250,000.
Promoting from within and our strong culture
Our culture and people are fundamental to how we perform, and we have further enhanced our senior management team with four recent promotions: Janine Cole to Director of Sustainability and Community; Helen Hare to Director of Project Management; David O'Sullivan to Director of Occupier & Property Services; and Lisa Day to Head of Occupier Services. These promotions reflect their demonstrated successful leadership of their respective teams, combined with the strategic and operational importance of the functions that they lead. We have also realigned the operating structure of our Occupier & Property Services team to support our increasing focus on customer experience and higher service provision.
During the period, we launched our Inclusion & Diversity strategy at an event for all employees, with participation from Richard Mully (Chairman) and Alison Rose (Non-Executive Director). We are also delighted with the results from our most recent employee engagement survey (October 2019), in which 94% of our team would recommend GPE as 'a great place to work', up from 89% in our previous survey in June 2017.
Valuation
Valuation is accompanied by graphics (see Appendix 2)
The valuation of the Group's properties was £2,645.0 million as at 30 September 2019, reflecting a valuation increase of 0.8% on a like-for-like basis since 31 March 2019. At 30 September 2019, the wholly-owned portfolio was valued at £2,008.4 million and the Group had three active joint ventures which owned properties valued at £636.6 million (our share) by CBRE.
The key drivers behind the Group's valuation movement for the six-month period were:
· rental value growth - since the start of the financial year, rental values increased by 1.0% on a like-for-like basis, with our office portfolio increasing by 1.4%, largely driven by our leasing performance, and our retail portfolio marginally down 0.2%;
· strong portfolio management - during the period, 52 new leases, rent reviews and renewals were completed, securing £19.2 million (our share) of annual income which helped to support the valuation. At 30 September 2019, the portfolio was 7.8% reversionary;
· good construction progress and pre-lettings at our development properties - the valuation of our committed development properties increased by 6.0% to £506.8 million (our share); and
· yields largely unchanged - equivalent yields reduced very marginally by 1 basis point over the period. At 30 September 2019, the portfolio true equivalent yield was 4.6%.
Including rent from pre-lets and leases currently in rent free periods, the topped up initial yield of the investment portfolio at 30 September 2019 was 4.2%, unchanged from the start of the financial year.
Whilst the overall valuation increased by 0.8% during the six months on a like-for-like basis, elements of the portfolio continued to show greater variation. We continued to see office portfolio values outperform retail with our office properties increasing by 1.3% compared to a 0.6% fall in retail values, as weaker retailer sentiment reduced ERVs. Furthermore, short leasehold properties (<100 years), which represent 18% of the portfolio, reduced in value by 2.0% compared to an increase of 1.5% in the rest of the portfolio, as investor demand for shorter leasehold assets reduced.
Our joint venture properties increased in value by 4.1% in the six months, driven by our letting successes at our recently completed 160 Old Street, EC1 development and further pre-let activity at Hanover Square, W1, while the wholly owned portfolio was marginally down by 0.2% on a like-for-like basis.
The Group delivered a total property return (TPR) for the six months to 30 September 2019 of 2.7% (2018: 2.2%), compared to the Central London MSCI quarterly benchmark of 1.8%, and a capital return of 1.0% (versus 0.2% for MSCI). This relative outperformance resulted from the strong returns on our development properties.
Our financial results
Our financial results are accompanied by graphics (see Appendix 3)
We prepare our financial statements using IFRS, however we also use a number of adjusted measures in assessing and managing the performance of the business. These include like-for-like figures to aid in the comparability of the underlying business as they exclude the impact of investment property additions and disposals and proportionately consolidated measures which includes the Group's gross share of the joint ventures. These metrics have been presented as management review and monitor the performance of the business on this basis.
We calculate net assets and earnings per share in accordance with the Best Practice Recommendations issued by the European Public Real Estate Association (EPRA). The recommendations are designed to make the financial statements of public real estate companies clearer and more comparable across Europe enhancing the transparency and coherence of the sector. We consider these metrics to be the most appropriate method of reporting the value and performance of the business and relevant reconciliations to the IFRS numbers are included in note 8 to the accounts.
EPRA NAV growth of 1.8%
EPRA net assets per share (NAV) at 30 September 2019 was 868 pence per share, an increase of 1.8% over the last six months, largely due to the 0.8% like-for-like increase in value of the property portfolio along with the positive impact of our share buyback. The main drivers of the 15 pence per share increase in NAV from 31 March 2019 were:
· the increase of 6 pence per share arising from the revaluation of the property portfolio. Of this amount, development properties increased NAV by around 10 pence;
· EPRA earnings for the period of 11 pence per share enhanced NAV;
· the final dividend of 8 pence per share reduced NAV;
· our share buyback programme enhanced NAV by 7 pence per share; and
· other movements, including pension adjustments, reduced NAV by 1 pence per share.
EPRA NAV growth of 1.8%, combined with the payment of last year's final dividend of 7.9 pence per share, delivered a total accounting return for the six months to 30 September 2019 of 2.7% (2018: 1.3%).
At 30 September 2019, the Group's net assets were £2,244.2 million, down from £2,309.7 million at 31 March 2019, with the decrease largely attributable to our share buyback programme. EPRA triple net assets per share (NNNAV) was 861 pence at 30 September 2019 compared to 850 pence at 31 March 2019 (up 1.3%). At the period end, the difference between NAV and NNNAV was the impact of the mark to market of debt of 7 pence per share, mainly arising from the Group's debenture and private placement notes.
EPRA EPS growth of 17.8%
EPRA earnings were £28.1 million, 11.1% higher than for the same period last year, predominantly due to reduced property costs as well as increased profits from our joint ventures.
Net rental income from wholly-owned properties was £39.5 million, down £0.5 million or 1.3% on last year, principally as a result of property sales in the prior year. Joint venture fees were £1.3 million, down £1.2 million on last year due to lower levels of transaction activity, as the investment properties in our joint ventures are now fully let. Taken together, rental income from wholly-owned properties and joint venture fees totalled £40.8 million, down 4.0% on the prior period. Adjusting for acquisitions, disposals and transfers to and from the development programme, like-for-like rental income (including from joint venture properties) increased 8.7% on the prior period.
Property costs reduced by £1.6 million to £4.5 million, principally due to reduced vacancy expenses and lower costs associated with our leasing initiatives in joint ventures. Administration costs were £13.7 million, an increase of £0.9 million, primarily as a result of increased provisions for performance related pay.
EPRA profits from joint ventures (excluding fair value movements) were £5.4 million, up from £2.5 million last year predominantly due to increased rental income from 160 Old Street, EC1 which is now fully let.
Gross interest paid on our debt facilities was £4.9 million, down £0.5 million on the prior period. The reduction in interest paid was due to the Group's £150 million convertible bond maturing in the latter part of the prior period. We capitalised interest of £2.9 million (2018: £1.9 million), a £1.0 million increase reflecting our increased wholly-owned development exposure when compared to the prior period. As a result, the Group had underlying net finance income (including interest receivable on joint ventures balances) of £0.5 million (2018: £0.7 million charge).
Revaluation movements together with increased EPRA earnings resulted in an IFRS profit after tax of £44.1 million (2018: £33.7 million). The basic earnings per share for the period was 16.7 pence, compared to 12.0 pence for 2018. The diluted earnings per share for the period was 16.7 pence, compared to 11.1 pence per share for 2018. Diluted EPRA earnings per share was 10.6 pence (2018: 9.0 pence), an increase of 17.8%, and cash earnings per share was similar to last year at 8.3 pence.
Results of joint ventures
The Group's net investment in joint ventures was £597.4 million, an increase from £511.9 million at 31 March 2019, due to a 4.1% like-for-like increase in value of the property portfolio and an increase in partner loan contributions to fund the Hanover Square development and repay the third party bank debt in GRP. Our share of joint venture net rental income was £8.7 million, up from £6.9 million last year as a result of successful leasing activity at our completed development at 160 Old Street, EC1. The underlying joint venture profits are stated after charging £1.3 million of GPE management fees (2018: £2.5 million) with the reduction attributable to reduced leasing activity given the joint venture investment properties are 100% let.
Overall, our three active joint ventures represent an important proportion of the Group's business. At 30 September 2019, joint ventures represented 24.1% of the portfolio valuation, 26.6% of net assets and 18.5% of rent roll (31 March 2019: 22.8%, 22.2% and 19.2% respectively).
Strong financial position with continued active balance sheet management and extending maturities
At September 2019, Group consolidated net debt was £322.7 million, up from £156.6 million at 31 March 2019 (30 September 2018: £116.3 million). The increase was largely due to amounts committed on the Group's share buyback of £86.0 million as well as the on-going development capital expenditure across the Group of £45.4 million in the six months. Group gearing increased to 14.7% at 30 September 2019 (31 March 2019: 6.8%) due to higher levels of on-balance sheet debt more than offsetting the increase in the portfolio value. Including the non-recourse debt in the joint ventures, total net debt was £351.8 million (31 March 2019: £224.0 million) equivalent to a loan to property value of 13.3% (31 March 2019: 8.7%). The proportion of the Group's total net debt represented by our share of joint venture net debt was 8.3% at 30 September 2019. At the end of the period, the Group, including our share of joint ventures, had cash and undrawn committed credit facilities of £434 million. In October 2019, we obtained bank consent to extend the maturity date of our flexible, low cost £450 million revolving credit facility by a further 12 months to October 2024.
The Group's weighted average cost of debt, including fees and joint venture debt, for the period was 3.3%, 10 basis points higher than at 31 March 2019 due to the maturity of the Group's convertible bond in the prior year. The weighted average interest rate (excluding fees) at the period end was 2.6%, down from 2.7% at 31 March 2019. At 30 September 2019, 84% of the Group's total drawn debt (including non-recourse joint venture debt) was provided on an unsecured basis (31 March 2019: 72%) and 89% was from non-bank sources (31 March 2019: 88%).
At 30 September 2019, 89% of the Group's total drawn debt (including non-recourse joint ventures) was at fixed or hedged rates (31 March 2019: 100%). Our weighted average drawn debt maturity was 6.4 years at 30 September 2019 (31 March 2019: 6.4 years).
Maintaining balance sheet discipline; £200 million on market share buyback completed
Over the last 12 months, we completed our £200 million return of surplus equity to shareholders through our share buyback programme. At 30 September 2019, we had repurchased and cancelled 22.6 million shares (£160.8 million including costs) with the £200 million programme completing on 13 November 2019. In total, we purchased 27.8 million shares at an average price of £7.20 per share (or £7.25 per share, £201.5 million including costs).
99% rent collection and robust tenant base
The quarterly cash collection performance has continued to be strong throughout 2019. We secured 98.9% of rent due within seven working days following the September quarter day, compared with 99.2% and 98.3% at March and June respectively earlier this year. Tenants on monthly payment terms represent around 7.9% of our rent roll (30 September 2018: 5.6%). One of our retail occupiers (Arcadia) at Mount Royal, W1 entered into a Company Voluntary Arrangement during the six months to reduce their rental payments by 30% until 2022, a reduction of £0.4 million per annum (our share) or 0.4% of rent roll. We also had one delinquency in the period representing less than 0.1% of rent roll. We continue to remain vigilant, regularly monitoring the financial position of our occupiers. In addition, we have further protection from any tenant defaults with £26 million of rent deposits and bank guarantees, representing around 21% of rent roll (including 100% of joint ventures).
Taxation
The tax charge in the income statement for the half year was £0.3 million (2018: £6.7 million) and the effective tax rate on EPRA earnings was 1% (2018: 0%). The majority of the Group's income is tax-free as a result of its REIT status. The tax charge for the period resulted from prior period adjustments in respect of items which fall outside our REIT ring-fence.
In general, as a REIT, the Group is broadly exempt from corporation tax in respect of its rental profits and chargeable gains relating to its property rental business but is otherwise subject to corporation tax. In particular, the Group is subject to corporation tax in respect of (i) any profits arising from trading properties and (ii) any gains arising on the sale of investment properties in respect of which a major redevelopment has completed within the preceding three years.
Additionally, during August 2019, HMRC published new guidance which states that it considers that the REIT exemption also does not extend to profits arising from the sale of investment properties which are undergoing a major redevelopment at the time of sale. The Group will continue to consider the potential effect of this guidance on any recent and future sales by the Group.
Dividends
The Board has declared an interim ordinary dividend of 4.7 pence per share (2018: 4.3 pence) which will be paid on 2 January 2020. All of this dividend will be a REIT Property Income Distribution (PID) in respect of the Group's tax-exempt property rental business.
Principal risks and uncertainties
The Group recognises that the successful management of risk is critical to enable delivery of the Group's strategic priorities. Ultimate responsibility for risk rests with the Board but the effective day-to-day management of risk is integral to the way the Group does business and its culture. The Board undertakes a robust assessment of the principal risks facing the Group on a regular basis.
The principal risks and uncertainties facing the Group for the remaining six months of the financial year remain those detailed on pages 74 to 88 of the 2019 Annual Report with no significant changes: market risk including relative underperformance of the Central London real estate market, weakening macro-economic environment for property investment and uncertainty surrounding the UK's exit from the EU; investment management risk; portfolio management risk; development management risk; financial risk including liquidity, interest rate and exchange rate risks and inappropriate capital structure; people risk; regulatory risk; and the risk of business interruption. The Board is closely monitoring the UK government's progress in resolving its exit from the EU, including any impact from the forthcoming general election. As a result, the Group's forecasts and business plans continue to be prepared under a variety of market scenarios, including to reflect different scenarios for our future relations with the EU.
Investor and analyst event
We will be holding an investor and analyst event on 13 February 2020. Further details will be provided nearer the time.
Condensed group income statement
For the six months ended 30 September 2019
Year to 31 March 2019
Audited
£m |
|
|
Notes |
|
Six months to 30 September
2019
Unaudited
£m |
|
Six months to 30 September
2018
Unaudited
£m |
112.4 |
|
Total revenue |
2 |
|
54.4 |
|
50.8 |
80.3 |
|
Net rental income |
3 |
|
39.5 |
|
40.0 |
3.8 |
|
Joint venture fee income |
11 |
|
1.3 |
|
2.5 |
84.1 |
|
Rental and joint venture fee income |
|
|
40.8 |
|
42.5 |
(11.9) |
|
Property expenses |
4 |
|
(4.5) |
|
(6.1) |
72.2 |
|
Net rental and related income |
|
|
36.3 |
|
36.4 |
(25.1) |
|
Administrative expenses |
|
|
(13.7) |
|
(12.8) |
- |
|
Development management revenue |
|
|
- |
|
0.1 |
(0.3) |
|
Development management costs |
|
|
(0.1) |
|
(0.2) |
(0.3) |
|
Development management losses |
|
|
(0.1) |
|
(0.1) |
14.4 |
|
Trading property revenue |
|
|
6.5 |
|
1.9 |
(23.9) |
|
Trading property cost of sales |
|
|
(5.9) |
|
(10.2) |
(9.5) |
|
Profit/(loss) on sale of trading property |
|
|
0.6 |
|
(8.3) |
37.3 |
|
Operating profit before (deficit)/surplus on property and results of joint ventures |
|
|
23.1 |
|
15.2 |
7.3 |
|
(Deficit)/surplus from investment property |
9 |
|
(8.3) |
|
17.7 |
10.0 |
|
Share of results of joint ventures |
11 |
|
29.1 |
|
6.8 |
54.6 |
|
Operating profit |
|
|
43.9 |
|
39.7 |
8.3 |
|
Finance income |
5 |
|
3.5 |
|
3.7 |
(8.1) |
|
Finance costs |
6 |
|
(3.0) |
|
(4.4) |
1.3 |
|
Fair value movement on convertible bond |
|
|
- |
|
1.4 |
56.1 |
|
Profit before tax |
|
|
44.4 |
|
40.4 |
(6.6) |
|
Tax |
7 |
|
(0.3) |
|
(6.7) |
49.5 |
|
Profit for the period |
|
|
44.1 |
|
33.7 |
All results are derived from continuing operations in the United Kingdom and are attributable to ordinary equity holders. |
|
|
|
|
|
|
|
|
|
|
17.9p |
|
Basic earnings per share |
8 |
|
16.7p |
|
12.0p |
17.1p |
|
Diluted earnings per share |
8 |
|
16.7p |
|
11.1p |
19.5p |
|
EPRA EPS |
8 |
|
10.6p |
|
9.0p |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed group statement of comprehensive income
For the six months ended 30 September 2019
Year ended
31 March
2019
Audited
£m |
|
|
Six months to 30 September
2019
Unaudited
£m |
Six months to 30 September
2018
Unaudited
£m |
49.5 |
|
Profit for the period |
44.1 |
33.7 |
|
|
Items that will not be reclassified subsequently to profit and loss: |
|
|
(0.9) |
|
Actuarial (loss)/gain on defined benefit scheme |
(2.4) |
0.9 |
0.2 |
|
Deferred tax on actuarial (loss)/gain on defined benefit scheme |
- |
(0.2) |
48.8 |
|
Total comprehensive income for the period |
41.7 |
34.4 |
Condensed group balance sheet
At 30 September 2019
As at
31 March
2019
Audited
£m |
|
|
Notes |
As at
30 September
2019
Unaudited
£m |
As at
30 September
2018
Unaudited
£m |
|
|
|
Non-current assets |
|
|
|
|
2,025.0 |
|
Investment property |
9 |
2,049.1 |
2,088.5 |
|
511.9 |
|
Investment in joint ventures |
11 |
597.4 |
484.4 |
|
4.0 |
|
Property, plant and equipment |
12 |
8.2 |
4.3 |
|
- |
|
Pension asset |
|
- |
1.7 |
|
2,540.9 |
|
|
|
2,654.7 |
2,578.9 |
|
|
|
Current assets |
|
|
|
|
5.6 |
|
Trading property |
10 |
- |
17.7 |
|
10.9 |
|
Trade and other receivables |
13 |
13.5 |
16.2 |
|
139.4 |
|
Cash and cash equivalents |
|
12.4 |
179.6 |
|
155.9 |
|
|
|
25.9 |
213.5 |
|
2,696.8 |
|
Total assets |
|
2,680.6 |
2,792.4 |
|
|
|
Current liabilities |
|
|
|
|
(47.1) |
|
Trade and other payables |
14 |
(52.9) |
(65.5) |
|
(3.3) |
|
Corporation tax |
|
- |
(8.5) |
|
(50.4) |
|
|
|
(52.9) |
(74.0) |
|
|
|
Non-current liabilities
|
|
|
|
|
(296.0) |
|
Interest-bearing loans and borrowings |
15 |
(335.1) |
(295.9) |
|
(40.7) |
|
Obligations under head leases |
17 |
(40.7) |
(40.8) |
|
- |
|
Obligations under occupational leases |
18 |
(5.2) |
- |
|
- |
|
Pension liability |
|
(2.5) |
- |
|
- |
|
Deferred tax |
7 |
- |
(0.3) |
|
(336.7) |
|
|
|
(383.5) |
(337.0) |
|
(387.1) |
|
Total liabilities |
|
(436.4) |
(411.0) |
|
2,309.7 |
|
Net assets |
|
2,244.2 |
2,381.4 |
|
|
|
Equity |
|
|
|
|
41.4 |
|
Share capital |
16 |
39.5 |
43.0 |
|
46.0 |
|
Share premium account |
|
46.0 |
46.0 |
|
324.0 |
|
Capital redemption reserve |
|
325.9 |
322.4 |
|
1,900.0 |
|
Retained earnings |
|
1,835.2 |
1,972.4 |
|
(1.7) |
|
Investment in own shares |
19 |
(2.4) |
(2.4) |
|
2,309.7 |
|
Total equity |
|
2,244.2 |
2,381.4 |
|
|
|
|
|
|
|
|
851p |
|
Net assets per share |
8 |
866p |
845p |
|
853p |
|
EPRA NAV |
8 |
868p |
849p |
|
|
|
|
|
|
|
|
Condensed group statement of cash flows
For the six months ended 30 September 2019
Year to
31 March
2019
Audited
£m |
|
|
Notes |
Six months to
30 September
2019
Unaudited
£m |
Six months to
30 September
2018
Unaudited
£m |
|
|
Operating activities |
|
|
|
54.6 |
|
Operating profit |
|
43.9 |
39.7 |
(13.7) |
|
Adjustments for non-cash items |
20 |
(20.6) |
(22.8) |
13.4 |
|
Decrease in trading property |
|
5.6 |
1.3 |
2.2 |
|
(Increase)/decrease in receivables |
|
(3.8) |
(1.6) |
(13.5) |
|
Increase/(decrease) in payables |
|
4.3 |
(9.7) |
43.0 |
|
Cash generated by operations |
|
29.4 |
6.9 |
(12.3) |
|
Interest paid |
|
(4.7) |
(5.0) |
1.3 |
|
Interest received |
|
0.6 |
0.5 |
(5.0) |
|
Tax paid |
|
(3.6) |
- |
27.0 |
|
Cash inflow from operating activities |
|
21.7 |
2.4 |
|
|
Investing activities
|
|
|
|
10.1 |
|
Distributions from joint ventures |
|
1.7 |
6.5 |
(35.6) |
|
Funds to joint ventures |
|
(49.0) |
(25.0) |
(47.6) |
|
Purchase and development of property |
|
(31.8) |
(30.9) |
(0.1) |
|
Purchase of plant and equipment |
|
- |
(0.1) |
342.1 |
|
Sale of properties |
|
3.9 |
270.1 |
(45.6) |
|
Investment in joint ventures |
|
(6.0) |
(32.1) |
223.3 |
|
Cash (outflow)/inflow from investing activities |
|
(81.2) |
188.5 |
|
|
Financing activities
|
|
|
|
- |
|
Revolving credit facility drawn |
|
40.0 |
- |
99.7 |
|
Issue of private placement notes |
|
- |
99.6 |
- |
|
Payment of lease obligations |
|
(1.4) |
- |
(149.6) |
|
Repayment of convertible bond |
|
- |
(136.9) |
(73.7) |
|
Purchase of own shares |
|
(85.9) |
- |
(306.0) |
|
Amounts paid in respect of B share scheme |
|
- |
(306.0) |
(32.7) |
|
Dividends paid |
|
(20.2) |
(19.4) |
(462.3) |
|
Cash outflow from financing activities |
|
(67.5) |
(362.7) |
|
|
|
|
|
|
(212.0) |
|
Net decrease in cash and cash equivalents |
|
(127.0) |
(171.8) |
351.4 |
|
Cash and cash equivalents at 1 April |
|
139.4 |
351.4 |
139.4 |
|
Cash and cash equivalents at balance sheet date |
|
12.4 |
179.6 |
|
|
|
|
|
|
|
|
|
|
|
|